Treasury May Capitalize Banks by End October

WASHINGTON(Reuters) – The U.S. Treasury Department plans to start directlyinjecting capital in U.S. banks as soon as the end of October inexchange for passive investment stakes, according to a financial policysource familiar with Treasury Secretary Henry Paulson’s thinking.

Under authority granted to it by last week’s $700 billion marketrescue legislation, Treasury would get common or preferred shares fromthe banks it capitalizes, the source told Reuters on Thursday. Thegovernment does not intend to seek board seats in the voluntarycapitalization program.

White House spokeswoman Dana Perino said later on Thursday thatPaulson is "actively considering" capital injections into troubled U.S.banks.

"Secretary Paulson is looking at all the different tools to figureout which ones should be used at what time and how robustly and howmuch money to put into each," she said.

Treasury’s plan to inject capital would follow action by the Britishgovernment on Wednesday in which it pledged billions of dollars toshore up banks’ capital in exchange for preference shares.

The source familiar with Paulson’s thinking said Treasury was working "extremely fast" to put together a capital injection plan.

The injections would get at the credit crisisby giving banks more capacity to lend, complementing the bailout bill’sobjective of removing soured mortgage-backed assets weighing downbanks’ balance sheets.

The source said the injections would likely be made public, whichcould cause some reluctance on the part of banks to use the capitalprogram for fear of exposing more vulnerabilities.

Paulson said on Wednesday that Treasury has wide latitude to buy orinsure troubled assets, provide guarantees and inject capital. "We willuse all of the tools we’ve been given to maximum effectiveness,including strengthening the capitalization of financial institutions ofevery size," he said.

(Additional reporting by Andy Sullivan; Editing by Tim Dobbyn)